Aberdeen Asset Managers is looking for opportunities to invest in 10-year Japanese government bonds....
Aberdeen Asset Managers is looking for opportunities to invest in 10-year Japanese government bonds.
Derek Fulton, global fixed income portfolio manager at Aberdeen, sees the yield on 10-year Japanese government bonds ranging between 1.25% and 1.5% for the next few months.
The asset class is currently yielding around 1.4%. In comparison, two-year Japanese government bonds offer a yield of 15 basis points while five-year debt offers 60.
According to Fulton, Aberdeen will be aggressive buyers of 10-year bonds if yields head towards 1.5% as he does not see them rising above this level.
He says: 'We are forecasting that calendar year GDP for Japan in 2001 will be down by 0.6%. For the calendar year 2002, we predict it will be down by 1.1%. We see inflation being around -0.6% in 2001 and -1.3% in 2002.
'The major problem is that when nominal GDP and inflation are falling, you can get a real problem where there is a massive debt burden in the economy. The debt is fixed and everything else is falling, which increases the debt burden.'
Fulton adds that Japan is the largest creditor in the world, meaning there is a massive pool of domestic savings and no reason why it cannot finance its current level of budget deficits. If the yen continues to weaken, however, there could be an element of capital flight, he says.
Jim Leaviss, head of retail and institutional fixed interest at M&G, says growth is not a word one needs to consider in Japan as it is an accelerating disaster.
'Its interest rates are at zero, unemployment is rising and it is difficult to see what the government and central bank can do to trigger growth,' he says. 'What happens next is the yen weakening as people begin to sell the currency.'
However, Leaviss believes one positive for the Japanese government bond market is the continued appetite domestic investors have for government debt, which they prefer to domestic equities.
He says: 'Because of the deflation in Japan, real yields are among the most attractive in the world, although we are worried about the currency and the government needs to borrow insatiably. Deflation is a positive for bonds but the problem for Japan is restructuring.
'In some areas of the economy, there are unproductive workforces and bad debts. Japan never went through the economic turmoil the US and the UK went through in the 1980s and its unemployment is low.'
M&G prefers yen-denominated corporate and supranational debt to Japanese government bonds ' Tesco offers a five-year yen-denominated corporate bond paying a yield of around 0.63%, for example. M&G also holds yen-denominated World Bank issues.
Japan is currently the lowest rated of the G7 economies with a debt rating of AA. Public debt is running at around 140% of GDP.
Fulton says: 'We have had deflation in Japan for around four years and the bond markets are offering a positive real return for the risk-averse investor. In global bond portfolios, we are underweight Japanese government bonds, although we are looking to lengthen our duration here,'
Deflation a positive for real bond yields.
Aberdeen looking at 10-year opportunities.
M&G favouring yen-denominated debt.
Nominal GDP falling in Japan.
Pressure on yen on back of crisis.
Government likely to remain large borrower.
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